Mining dogs with the biggest bite

The “Dogs of the Dow" strategy of buying the worst performing stocks on the index on the belief they will rebound next year is likely to be one of the better performing strategies for 2012, and the best place to hunt for these dogs is in the mining space.

After all, the major miners have been one of the biggest drags on the market for 2011 amid fears of a commodities slump should the European debt crisis cause a global economic contraction.

The biggest three contributors to the 14.5 per cent slump in the S&P/ASX 200 Index are
BHP Billiton
,
Rio Tinto
and
Newcrest Mining
, respectively; and
Fortescue Metals Group
took the ninth spot with a 35 per cent plunge in its share price.

However, there are more broker “buy" recommendations in the mining sector compared with almost every other sector. Most equity strategists are urging investors to be overweight on miners for 2012 on the belief that the market has factored in too much downside risks into current share prices than the fall in the related underlying commodity prices would imply.

Mining stocks that are rated a “buy" by all brokers polled on Bloomberg include
Sundance Resources
,
Rio Tinto
,
Mineral Deposits
and
Ramelius Resources
.

African-focused iron ore miner Sundance is perhaps one of the more controversial calls, with the stock generating a total loss of 31 per cent over the past year. Investors were taken on a rollercoaster ride on doubts if Hanlong Mining could complete the takeover of the company after the Chinese company’s senior executives were investigated for insider trading.

However, the slump in Sundance’s share price is more a sentiment-driven issue and does nothing to erode the strong fundamentals of the miner, which is looking to develop the prospective Mbalam iron ore project in Central West Africa.

Some experts believe Hanlong will be able to close the deal as accusations of wrongdoing are levelled against individuals and not the organisation; and if Hanlong had to walk away, there would be other corporate predators that would be more than happy to take a closer look at Sundance.

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The stock shed 1¢ on Tuesday afternoon to 38.5¢. The average broker price target is about 58¢ a share.

The latest manufacturing data from India and China bodes well for Rio Tinto as its share price struggles to stay ahead of October’s two-year low of $59.

While most expect iron ore prices and the Chinese economy to weaken in 2012, analysts are finding it hard to justify the $10.2 billion drop in the value of the diversified miner over the past 12 months.

The stock is trading on a depressed one-year forward price-earnings of 7.4 times and is at a 52 per cent discount to the average broker price target of $92.93 a share.

Rio Tinto gained $1.23 to $61.53 in afternoon trade.

Meanwhile, analysts are bullish on Mineral Deposits, largely because of the Grand Côte mineral sands project that it is developing in Senegal. Brokers are also excited about Ramelius Resources’ first gold pour at its Mount Magnet facility in Western Australia later this month.

The stocks have a potential upside of 85 per cent and 40 per cent, respectively, to their average price targets of $9.33 and $1.53.